S T A T E _ O F _ T H E _ S T A T E

Pension fund
key to tax cuts

Cayetano seeks a one-time lag
in paying the $50 million contribution

By Mike Yuen
Star-Bulletin

A key element of Gov. Ben Cayetano's plan to provide $53 million in tax breaks and cover a $170 million budget shortfall rests on the Legislature's rewriting a law to allow a drop in the state's contribution to the state Employees Retirement System.

The change would provide the state with a one-time saving of more than $50 million, the Star-Bulletin has learned.

That would be nearly enough to finance Cayetano's seven tax relief proposals to aid hotel owners, first-time home buyers, Kauai and Molokai businesses, college students, low-income taxpayers and those caring for elderly family members.

Details of the initiative surfaced yesterday after Cayetano had a 90-minute, closed-door meeting with the Senate's Democratic majority in an effort to sell his legislative program.

His plan also includes an accelerated, $1 billion construction program and initiatives to fight crime, promote education and resolve potentially expensive native Hawaiian ceded land claims.

The meeting came after Cayetano's State of the State speech, which left many wondering how he was going to pay for "all his hopes and dreams," as House Speaker Joe Souki (D, Wailuku) put it.

Cayetano also has to balance the state's upcoming two-year, $11.5 billion operating budget.

And while Cayetano denied it, others thought there was a political spin to his upbeat 42-minute address.

"This is a meatier speech," said Senate President Norman Mizuguchi (D, Aiea), whose name surfaced last year as a potential challenger to Cayetano.

"He has an election to run in 1998. The last two years were rather dismal; he had no great message for the people of Hawaii. I think he's trying to share optimism and hope with the people of Hawaii that things are not that bad and that he's willing to give back (tax) deductions and credits for certain, specific programs."

According to Democratic senators and Capitol sources, when Cayetano huddled with Senate Democrats, he revealed that he wants to institute "a double trigger" that has to be activated before the state is required to make contributions to meet actuarial obligations for the state pension fund. That change would mean the state would be spared from having to send $50 million to the retirement fund, they said.

Presently, under a single-trigger mechanism, the state has to cover the difference whenever its pension investment earnings from stocks bought and sold fall below 8 percent.

Cayetano wants a double trigger, in which the state would make actuarial contributions only if earnings fell below 8 percent on stocks bought and sold and on those that weren't traded but which simply remained in the state's portfolio.

Asked if the state can afford Cayetano's proposed tax breaks, Mizuguchi replied: "That's the $64,000 question. Certainly he wants to spur the economy not only in the area of tax credits but he wants a $10 million emergency promotion and advertising fund for the Far East."

Mizuguchi wondered if an emergency appropriation is necessary, since some Japanese travel industry executives have said that if crime in Waikiki dropped, perhaps more Japanese visitors would come.

"We have no control over the Japanese economy, the weakening of the yen, the number of direct flights," Mizuguchi said. "So all of these things will be discussed with the governor as he approaches both houses for the appropriations."

Marumoto said Cayetano's tax-cutting plan doesn't go far enough because while it helps lower-income people, it offers no relief for the middle class.

Cayetano has made no secret that his financial plan to balance the state's budget for the next two years includes:

A payroll lag for state workers, saving $47 million.

An end to the insurance premium tax credit that favors local companies over out-of-state firms, saving approximately $40 million.

The transfer of the $2-a-day surcharge on rental cars from the highway fund to the general fund, netting $20 million.

Capping the counties' share of hotel room tax revenues at the 1995 level, giving the state as much as $11 million.

Honolulu Mayor Jeremy Harris, who some believe is a potential challenger to Cayetano in 1998, protested Cayetano's planned raid on the counties' share of the hotel room tax.

"If the governor takes away (Honolulu) County's hotel room tax money, it's the same as raising residential property taxes," he said. "It's just doing it through the back door. I guess that's how the governor intends to pay for the tax cuts he's proposing for the hotels, taking it out of the city coffers."

Senate Co-Majority Leader Mike McCartney (D, Kaneohe) said the plan rests on 12 to 20 bills the administration is pushing. If any one is rejected, it will mean cuts will have to be made. "The numbers do fit," he said. "The challenge is making policy changes so that the numbers become a reality."

The pressure is on Cayetano to deliver on his proposals, said House Minority Leader Gene Ward (R, Hahaione Valley).

"He's got to come through. If he doesn't come through, in '98 he's going to really be in jeopardy."